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18 January 2019

EFAMA's reply to BCBS consultative document on revisions to leverage ratio disclosure requirements

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EFAMA supports objectives to mitigate risks and make derivatives market safer. However, EFAMA would like to use the opportunity presented by this consultation to draw attention to fund managers experience of difficulties in obtaining access to clearing and the costs this incurs that must be supported and reduces the benefits to use central clearing.

EFAMA welcomes the opportunity given by the Basel Committee on Banking Supervision Consultative Document on Leverage ratio treatment of client cleared derivatives.

Promotion of central clearing of standardised derivative contracts to mitigating systemic risk and make derivatives markets safer is one of the primary objectives of BCBS post crisis reforms.

With respect to costs of clearing, the current leverage ratio methodology is particularly penalizing end users that are posting margins in order to protect Clearing Member and the CCP from their own default. 

This is particularly the case for fund managers that tend to have very directional derivatives portfolios, used mainly for hedging but also to gain market exposures. Having directional exposure involve porting large amounts of initial margins when compared to the notional of transactions.

Incidentally, the more margins are posted to protect against risk of default the worse it is for clearing members that are acting as an intermediary in terms of capital requirement. I.e. the more a client protects others against its own default the more he has to pay for it. This effect is counterproductive and goes against regulators objectives of providing incentives to clearing.

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© EFAMA - European Fund and Asset Management Association

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